PhotoBy most accounts, a building wave of foreclosures served as the catalyst for the housing market meltdown and financial crisis of 2008. Five years later the falling rate of foreclosures suggests the housing market has regained its equilibrium.

A recent report by CoreLogic found about one million U.S. homes in foreclosure inventory at the end of June. That's down about 400,000 from June 2012, a year-over-year decrease of 28%. It also represents a 2.9% drop from the previous month.

That one million homes currently in some stage of foreclosure represent 2.5% of all homes in the U.S. with a mortgage. That compares to 3.4% in June 2012.

Are things back to normal yet? Despite the recent improvement, probably not. With 4.5 million homes lost to foreclosure over the last five years, that works out to 900,000 foreclosures per year, on average. In a typical month before 2007, the number was closer to 250,000.

Subprime time bomb

Many of the foreclosures in 2008 and 2009 were directly linked to subprime loans. Consumers who couldn't really afford the homes they purchased were able to get subprime loans that offered very low “teaser” rates for the first year or two before they adjusted sharply higher.

When the loan rates adjusted, the homeowners, in many cases, couldn't afford the monthly payment. Foreclosures began to build within the market, adversely affecting mortgage-backed securities and setting off the banking crisis.

But unfortunately the foreclosure wave spread beyond the subprime sector. The collapse of the housing market and the onset of the banking crisis turned the recession into the Great Recession, causing unemployment to surge. All of a sudden people with prime loans lost their jobs and were unable to keep making their house payments. In 2010 the foreclosure wave continued to build.

The latest numbers suggest stability is returning but there are still some areas of concern. RealtyTrac, in its report on July foreclosures, found that foreclosure activity increased 2.0% over June, while sharply lower from year-over-year levels. Much of the July jump was caused by a spike in foreclosure starts during the month. In the video below, RealtyTrac's Daren Blomquist provides an overview of the findings.

Other data

Other data may also be cause for concern. According to an August report by PropertyShark.com, foreclosure activity is picking up in the nation's largest real estate market. The report found that 348 New York City properties were scheduled for auction in the second quarter of 2013, a 138% surge from the first quarter. That's up 39% year-over-year, with only Manhattan and Staten Island showing signs of stability.

With data on the issue presenting a mixed picture, the consumer group Center for Responsible Lending is expressing concern about policies it says will likely discourage first-time home buyers and perhaps threaten the housing recovery. In particular, it says a proposal for government-mandated down payment standards would weaken the housing market and overall economy.

“A successful housing market needs new homeowners available to purchase properties,” CRL said in a statement. “If mandated down payment standards went into effect – instead of letting the market determine appropriate down payment standards – then fewer families could become first-time home buyers.”

Using 2010 figures the group said it would take the typical U.S. family 22 years to save for a 10% down payment for the typical home. Closing costs for fees and escrow often require another 3% in savings.

“This decreased demand for housing would result in falling housing prices. In this situation, existing homeowners would lose equity in their homes, possibly pushing them underwater on their mortgage and even into default,” CRL said. “As a result, down payment mandates could undermine the nascent housing market recovery and plunge the economy into turmoil.”


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